The Borowiak Rose Water Company expects with some degree of certainty to generate the following net income and to have the following capital expenditures during the next five years (in thousands of dollars):
|
|
YEAR |
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|
|
1 |
2 |
3 |
4 |
5 |
|
Net income |
$2,000 |
$1,500 |
$2,500 |
$2,300 |
$1,800 |
|
Capital expenditures |
1,000 |
1,500 |
2,000 |
1,500 |
2,000 |
The company currently has 1 million shares of common stock outstanding and pays annual dividends of $1 per share.
a. Determine dividends per share and external financing required in each year if dividend policy is treated as a residual decision.
b. Determine the amounts of external financing that will be necessary in each year if the present annual dividend per share is maintained.
c. Determine dividends per share and the amounts of external financing that will be necessary if a dividend payout ratio of 50 percent is maintained.
d. Under which of the three dividend policies are aggregate dividends (total dividends over five years) maximized? External required financing (total financing over five years) minimized?